Let’s go through this systematically. --- **1. Sector and regulatory assessment** Hera S.p.A. is an Italian multi-utility with regulated and semi-regulated activities (gas, water, electricity distribution, waste management). Multi-utilities in Italy operate under national regulatory frameworks that are generally transparent, with tariff-setting mechanisms allowing cost recovery plus a return on invested capital. That would typically place regulatory advantage in the "adequate" to "strong/adequate" range. --- **2. Business risk profile – financial performance trends** - **Revenue** nearly doubled from €10.6bn (2021) to €20.1bn (2022), likely driven by higher energy commodity costs passed through to customers. - **EBIT** declined from €612mn to €534mn. - **Net income attributable to parent** fell from €333mn to €255mn. - **Cash from operations** fell dramatically from €1,045mn to €36mn, largely due to a huge working capital outflow (€928mn negative vs €48mn positive in 2021). That reflects increased inventories and trade receivables from high energy prices. - **Capex** increased: €710mn in 2022 vs €589mn in 2021. - **Net financial liabilities** increased sharply – non-current financial liabilities rose from €3.72bn to €5.69bn, total equity only modestly up from €3.42bn to €3.64bn. --- **3. Leverage and headroom** Rough adjusted leverage metrics based on balance sheet: - Total equity (including minorities): €3.64bn. - Gross debt (non-current + current financial liabilities, excluding leases): approx €5.69bn + €0.65bn = €6.34bn. - Cash: €1.94bn → net debt ≈ €4.4bn. Net debt / equity ≈ 1.2x. FFO / net debt would be very weak in 2022 due to working capital absorption, but the question is forward-looking – normalization of working capital should restore cash generation. Still, financing needs have increased significantly. --- **4. Capital structure and hybrid rationale** - **No existing hybrids mentioned** – equity breakdown shows only issued capital, reserves, retained earnings, and minorities. That implies current hybrid ratio is 0%. - **Interest costs:** Finance costs fell from €300mn to €217mn despite higher gross debt, suggesting low average cost of debt. - **Market rates:** EUR swap rates rose sharply in 2022 (5Y from -0.26% to +1.73%, 10Y to 1.93%). Corporate spreads widened (iBoxx sub-senior delta at 2.3% in 2022 vs 1.3% in 2021). A new hybrid would likely carry a significantly higher coupon than existing senior debt, increasing average cost of debt. --- **5. Refinancing and capex needs** Hera is not facing an imminent refinancing wall (large cash position, decent maturity profile), but it has: - Meaningful capex program (~€700mn+ per year). - Working capital swings that could stress liquidity. - Leverage increasing, but not yet at levels that would threaten investment-grade metrics under S&P’s medial volatility table for a regulated utility. --- **6. Alignment with guidance** - **0%**: Fits the "no current hybrid", cost of hybrid materially above existing debt cost, no extreme leverage pressure, IG metrics likely sustainable without hybrid. - **3.75%**: Could be justified for mild optimization, but given high incremental cost and moderate funding needs, not clearly necessary. - Higher percentages imply severe rating pressure or transformational M&A, which is not evident here. --- **Conclusion** Given the starting point of zero hybrids, lower profitability, high cash volatility but ultimately manageable leverage, and materially higher hybrid coupon versus existing debt cost, the balance tilts toward **no issuance** in the 18-month window. --- 0%